Return on Assets (ROA) and Return on Common Equity (ROCE) Computations

A.       No Tax Example

            CASE        
      A B C D   E F G
Assets     $200 $200 $200 $200   $200 $200 $200
Liabilities     $0 $50 $100 $150   $50 $100 $150
Shareholders' Equity     200 150 100 50 150 100 50
  Total L and SE   $200 $200 $200 $200   $200 $200 $200
                     
Net Income before Interest     $30 $30 $30 $30   $30 $30 $30
Interest   12% 0 6 12 18 18% 9 18 27
  Net Income   $30 $24 $18 $12   $21 $12 $3
Return on Assets Computation                    
Net Income + Interest     $30+0 $24+6 $18+12 $12+18   $21+9 $12+18 $3+27
Assets                               $200 $200 $200 $200   $200 $200 $200
                     
  ROA   15% 15% 15% 15%   15% 15% 15%
Return on Common Equity Computation                    
Net Income - Pref. Dividends     $30 $24 $18 $12   $21 $12 $3
Shareholders' Equity     $200 $150 $100 $50   $150 $100 $50
                     
  ROCE   15% 16% 18% 24%   14% 12% 6%
                     


B.    Example         with Taxes		 tax rate = 30%                  
Net Income before Interest     $30 $30 $30 $30   $30 $30 $30
Interest   12% 0 6 12 18 18% 9 18 27
Net Income before Taxes     $30.0 $24.0 $18.0 $12.0   $21.0 $12.0 $3.0
Taxes   30% 9.0 7.2 5.4 3.6   6.3 3.6 0.9
  Net Income   $21.0 $16.8 $12.6 $8.4   $14.7 $8.4 $2.1
                     
Return on Assets Computation                    
Net Inc. + Int *(1-T)     $21.0 $16.8+6*.7 $12.6+12*.7 $8.4+18*.7   $14.7+9*.7 $8.4+18*.7 $2.1+27*.7
Assets                                $200 $200 $200 $200   $200 $200 $200
                     
  ROA   10.5% 10.5% 10.5% 10.5%   10.5% 10.5% 10.5%
Return on Common Equity Computation                    
Net Income - Pref. Dividends     $21.0 $16.8 $12.6 $8.4   $14.7 $8.4 $2.1
Shareholders' Equity     $200 $150 $100 $50   $150 $100 $50
                     
  ROCE   10.5% 11.2% 12.6% 16.8%   9.8% 8.4% 4.2%


Last Updated on 12/9/97